Tsingtao Brewery Group

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Tsingtao Brewery Group

Tsingtao Beer Tower, 56 Dengzhou Road
Qingdao, Shandong 266071
Telephone: +86 (532) 571-1119
Fax: +86 (532) 571-4719
Web site: http://www.tsingtaobeer.com

Public Company
Employees: 5,200
Sales: $416.6 million (2000)
Stock Exchanges: OTC
Ticker Symbol: TSGTY
NAIC: 312120 Malt Beverages

Tsingtao Brewery Group is the parent of publicly traded Tsingtao Brewery Company Limited, which is renowned for its Tsingtao beer, the top-selling beer in China as well as that countrys leading export beer. Tsingtao was part of the China Nine, the first group of Chinese companies to sell stock on the public market in 1993. Tsingtao has been aggressively growing in recent years, acquiring companies and increasing its production output.

Early 1900s: British and German Roots

In 1903, the Qingdao Brewery Factory was founded by a group of businessmen from Great Britain and Germany. The process, equipment, and raw material were all German imports, but the local water in Qingdao, China, was the ingredient that made the beer distinctive. The spring water used in the recipe was from the mountain area of Laoshan. The beer was awarded a gold medal at the Munich International Exhibition in 1906.

Germany had been a presence in China since 1861, focusing on the Qingdao region specifically. In 1897, after the murder of two German missionaries, Germany began an official occupation of the Shangdong Province and Kiaochou peninsula, obtaining a 99-year lease in 1898. The area was then considered a colony and administered by the German navy.

1910s80s: War and Foreign Control

The history of Tsingtao Brewery essentially paralleled the history of modern-day China. When China was occupied, so was the brewery. As China embraced Communism, so the brewery became a state-owned business. When China opened its doors, Tsingtao was one of the first products to be exported.

Japan, an Allied power in World War I, seized the city from Germany on November 7, 1914. Germanys presence in China was greatly depleted, and Germany lost all of its colonies at the end of the war. Then, in 1922, the city Qingdao as well as the Tsingtao brewery were absorbed into China. During World War II, the Japanese again took control, but then a few years after the war, China became a Communist country. The brewery then became a state-owned business.

Tsingtao was first exported in 1954, but it was in 1979, as China was opening its doors to the world, that Tsingtao became well known outside the country. The government in Beijing named Tsingtao the official export beer of China.

Early 1990s: New Tsingtao Leading the Way in Public Markets

Tsingtao Brewery Company Limited was formed in 1993 when the four breweries that produced the beer merged to form one company. The merger into one larger state-owned company preceded the historic listing of Tsingtao Brewery and eight other companies on the Hong Kong Stock Exchange. Prior to 1993, no Chinese companies had been publicly sold.

Tsingtao Beer is Chinas most popular brand of beer and is regarded by foreign beer drinkers as one of Chinas best products, said Zhang Yadong, chairman of the newly formed company in the South China Morning Post, June 15, 1993. It is a frequent award-winner in overseas beer competitions such as in the United States and Belgium.

The Hong Kong exchange rules stipulated that at least 25 percent of each company be offered when the China Nine, as they were identified, went public. Tsingtao issued 317.6 million H shares at $2.80 per share and raised HK$900 million. In July 1993, Tsingtao became the first of the nine Chinese state-owned companies to list on the Hong Kong Stock Exchange. After the stock sale, the Qingdao State-Owned Asset Bureau owned 44 percent of Tsingtao, the Bank of China and other Peoples Republic parties owned 10 percent, and another 35 percent was owned publicly, including 5 percent purchased by the U.S. company Anheuser-Busch in the initial public offering.

Investors were attracted to the Tsingtao stock because, of the nine companies, Tsingtao had the most recognizable name outside of China and because Tsingtao was considered to have high growth potential. Per capita beer consumption was low in China compared with other companies, but with a population of 1.2 billion people, the Chinese market was identified as one of the largest beer markets in the world, with the potential to become even larger. While some analysts had predicted a tremendous oversubscription for the stock offer, the reality was a modest oversubscription. The stock opened at 27 percent higher than the public offering price.

Controversy soon surrounded the newly listed stock as Tsingtao refused to announce interim results for the first half of 1993. The Hong Kong exchange responded by acknowledging that Tsingtao was not obligated to release the results for the first interim but would be required to publish full disclosure of results for the end of the year. The company cited administrative reasons for the failure to announce results. Both investors and analysts were disappointed by the companys decision. Tsingtao assured those concerned that future results would be published promptly and that it would meet the profit forecast for the full year.

Tsingtao met those forecasts when it announced a jump in profits for 1993. Profits were up 316.2 percent to HK$168.7 million. The board of directors is pleased with the results and the companys achievements throughout the year, said Zhang Yadong, chairman of Tsingtao in the April 28, 1994 issue of the South China Morning Post.

Despite the fact that Tsingtao fulfilled its profit expectations, its refusal to release interim results in the months after it became public prompted a change in the listing rules on the Hong Kong Stock Exchange. As of June 1, 1994, newly listed companies were required to issue interim results for the first period after becoming listed on the exchange.

In July 1994, Zhang Yadong, the chairman of Tsingtao, resigned as chairman and general manager but retained his position as the Communist Party committee secretary at Tsingtao. He worked diligently and seriously and made important contributions in the reorganization of the company into a joint stock company, in introducing the company to the international community, in raising capital from local and foreign sources and in the overall planning design of the company, announced company secretaries Yan Wen-ming and Cheung Yuk-tong in the July 26, 1994 issue of the South China Morning Post. Tsingtao announced that Liu Deyuan would become chairman while Shao Ruiqi was named general manager. Liu had been a director of the company, and Shao had worked in the management area of Tsingtao.

Despite rising costs for raw materials, results for the first half of 1994 showed a profit due to an increase in sales to overseas markets. The company announced that the cost for raw materials had increased by 15 to 20 percent. The company won a court award in 1994 when it sued a competitor over brand-name copyright infringement. The competitor, Ming Zhu Brewery, was ordered to pay 1.09 million yuan in damages to Tsingtao. Also, the company announced that sales in the European market had increased 31 percent. In October 1994, Tsingtao expanded production by purchasing the Yangzhou Brewery in Jiangsu province for 80 million yuan (HK$72 million).

1995 to 2000: Growing Pains for Tsingtao

Anheuser-Busch Companies, owner of 5 percent of Tsingtao, purchased 80 percent of another Chinese brewer, Zhongde Brewery in Wuhuan, in 1995 and announced that it was interested in increasing its investment in Tsingtao as well. The announcement resulted in a 13.1 percent increase in the share price of Tsingtao. Tsingtao was enthusiastic about the proposed increase in investment by Anheuser-Busch.

However, soon the company was being questioned about its practice of lending money to third-party businesses. According to an April 9, 1995 article in the South China Morning Post, the company had been lending funds raised from its stock shares to just about anyone who needs it. Analysts had alleged that Tsingtao was now short of expansion funds because of over-extending its lending business. The company responded by announcing that only surplus working capital was being used as short-term loans. Tsingtao requested that sale of its stock be suspended for a day amid the controversy and attempted to assure investors that the loans were not a risk to the companys future. The loans, stated Tsingtao, were secured and guaranteed by the Shandong branch of the Bank of China. Despite the assurances from the company, the existence of the loans left Tsingtao with a shortfall of 1.3 billion yuan for announced expansion plans and an uncertainty of how that money would be raised.

Company Perspectives

The goal of the Group is to fully utilize its edges in brand and technology and expand the economy of scale through purchasing, merging and setting up of new factories based on the national capital. The Group will speed up to diversify its operations and find and cultivate new economy increasing points to build the Group into a large comprehensive trans-regional enterprise group.

The controversy, combined with a 42 percent drop in profits, caused stock prices to fall and questions to rise about Tsingtao and its business practices. The company abruptly changed its plans to expand existing production facilities and instead presented a strategy for building new plants. Tsingtaos goal, to increase production by 400 percent by the year 2000, was planned to keep up with the projected growth in the domestic beer market and increase the brewerys share of the Chinese market from a little over 2 percent to 10 percent. In spite of only having 2.2 percent of the fragmented market, Tsingtao was the largest of the 800 Chinese breweries.

A December 7, 1995 article in the New York Times highlighted several problems facing Tsingtao. In addition to the questionable loans granted by Tsingtao to other businesses, the article stated that the negotiations between Anheuser-Busch and Tsingtao had stalled because Anheuser-Busch, a U.S. company, was disappointed in Tsingtaos performance and unsure about Tsingtaos ability to expand its market share. Foreign markets made up only 10 percent of Tsingtaos sales, and the company refused to advertise to boost sales. A distributor quoted in the article stated, Theyre amazingly arrogant. They say, Were Tsingtao, we dont need to advertise. Its so ridiculous. Even Coca-Cola has to advertise.

Another decline was reported for 1995, with profits falling 9.59 percent. Production and sales continued to rise, but the company noted that the cost of raw materials had again increased. Foreign competition from labels such as Fosters, Carlsberg, and San Miguel kept Tsingtao from gaining more than a few tenths of a percentage in market share. Talks between Anheuser-Busch and Tsingtao were officially ended in 1996, and Anheuser-Busch aligned with one of Tsingtaos rivals while planning to begin selling Budweiser beer in China. Bud-weisers name is Bai Wie Pijiu in China.

As the possibility of obtaining expansion money from foreign investors faded, Tsingtao looked to the government and the Peoples Bank of China for a loan of 100 million yuan. Other changes at the company included the retirement of Chairman Liu Deyuan and the assignment of Vice-Chairman Shao Ruiqi to a government post, along with former Chairman Zhang Yadong. Li Guirong was appointed as the chairman of the company in 1996.

By 1997, China was forecasted to become the worlds biggest beer market, overtaking the U.S. market by the year 2000. However, the forecast did not soften the blow for Tsingtao as it announced a net profit loss in 1996 of 73.7 percent. The company announced that the 1996 figures were attributable to the switch in strategy and leadership that happened during July of that year. Despite the profit loss announced in April, Tsingtao moved forward with its expansion plans to purchase more breweries in the last half of 1997.

Purchases of Nanjizhou Brewery Group, Rongcheng Brewery, Anqui Brewery, Maanshan Brewery, and Huangshi Brewery were completed in the first half of 1997. They helped expand Tsingtaos production capacity by 200,000 tons. In 1997, Tsingtao seized 8 percent of the domestic market to secure its leading brewer status. In July 1997, Tsingtao restructured its organization by establishing a holding company backed by the Shandong provincial government.

In early 1999, Tsingtao again went to battle over its trademark and filed a lawsuit against China Beer (Hong Kong). China Beer had been Tsingtaos distributor in Hong Kong, but after January 1999, Tsingtao switched to Tsingtao Beverage (Hong Kong) Co., Ltd. for its Hong Kong distribution. China Beers aggressive advertising campaign hindered Tsingtaos distributor change. In August, Tsingtao won the lawsuit and reclaimed use of its trademark.

A 1998 increase in profits was announced in April 1999. Profits increased 34.8 percent and annual beer production rose as well. In September 1999, Tsingtao acquired the assets of Shanghai Brewery Co., Ltd. to further expand production. The acquisition was part of an 80 percent production increase for 1999 that resulted in over one million tons of beer production, a company record.

2000 and Beyond: WTO Further Opening World for Tsingtao

In 2000, China joined the World Trade Organization and agreed to eliminate tariffs and trade barriers that had provided protection for the government-owned companies in the Communist country. While some Chinese companies feared the foreign competition, Tsingtao had been competing in the world market for decades. The company was ready for the transition and had made many changes since its 1993 IPO. The company implemented increased advertising and promotions as well as strict reporting to stockholders and analysts in response to the lessons learned since 1993. Some industries are afraid of foreign competition. Competing with foreign brands, we learned how markets worked, said Peng Zuo Yi, Chief Executive of Tsingtao in a January 18, 2000 article in USA Today.

Tsingtao continued its aggressive brewery acquisitions and purchased Carlsberg Hong Kong, Asia Shuang He Sheng Five Star Beer Co., Ltd., Three Ring Asia Pacific Beer Co., Ltd., and New Laoshan Brewery. The companys 2000 results included a net profit increase of 52 percent. In 2001, Tsingtao chairman Li Guirong announced that the company would be continuing to increase production but that the major acquisitions had been completed. The new goals of the company, he announced, would be to further increase production quantities and to raise Tsingtaos share of the domestic market from 10.7 percent to 15 percent by 2004. Profits for 2001 increased 31 percent, and Tsingtao increased its share of the Chinese market to 11 percent.

Key Dates

German and English businessmen found Tsingtao Brewery.
Japan seizes Tsingtao Brewery.
Tsingtao again becomes a Chinese company.
Communists take control of China.
Tsingtao exports beer.
Beijing names Tsingtao official export beer of China.
Tsingtao Brewery Company Limited is formed; Tsingtao offers IPO on Hong Kong Stock Exchange.
Zhang Yadong retires as chairman, replaced by Liu Deyuan.
Li Guirong becomes chairman after company reorganization.
Tsingtao is restructured as a holding company.
Tsingtao produces over one million tons of beer.
China joins the World Trade Organization.

As Tsingtao Brewery entered the first years of the 21st century, it was poised to build on the successes and lessons of a century of company history. The company worked to increase and seize market share, realizing its opportunity in the high growth potential of its own country as well as abroad.

Principal Subsidiaries

Tsingtao Brewery Company Limited.

Principal Competitors

Anheuser-Busch Company, Inc.; Yanjing; CBR Brewing.

Further Reading

Alexander, Garth, China Issue Sparks Anger, Sunday Times, October 31, 1993.

Beveridge, Dirk, War in Hong Kong Over Tsingtao Beer Has Both Sides Frothing, Pittsburgh Post-Gazette, January 14, 1999, p. F6.

Big Thirst for Hong Kongs First Chinese Share Offer, Independent (London), July 6, 1993, p. 27.

Carey, Christopher, Busch Buys into Chinese Brewery, St. Louis Post-Dispatch, June 29, 1993, p. 6B.

Chan, Christine, Tsingtao Brewery Outlines Detailed Strategy for Hong Kong Listing, South China Morning Post, June 16, 1993, p. B2.

, Tsingtao Bubbles with 316pc Leap in Results, South China Morning Post, April 28, 1994, p. B1.

, Tsingtao Profit Falls 49pc, High Costs and Rivalry Knock Back Brewers Interim Gains, South China Morning Post, August 29, 1995, p. B1.

, Tsingtao Public Offer Subscribed 111 Times, South China Morning Post, July 8, 1993, p. B3.

Chan, Christine, and Carrie Lee, Tsingtao Set to Lead China Nine with $900m Issue, South China Morning Post, June 26, 1993, p. B1.

Chapel, Chris, Beer Offer Spilling Over, South China Morning Post, July 1, 1993, p. B20.

, Tsingtao to Smash Listing Records, South China Morning Post, July 1, 1993, p. B1.

China Brewery to List in Colony, Nikkei Weekly, July 5, 1993, p. 24.

Clifford, Mark L., Its Enough to Make You Drink, Business Week, September 29, 1997, p. 124.

Corporate Revamp at Tsingtao, South China Morning Post, June 15, 1993, p. B2.

Cramb, Gordon, Chinas Drinkers Head for Top of World Beer League, Financial Times (London), February 11, 1997, p. 4.

Davies, Simon, and Nikki Tait, Anheuser-Busch Takes Five Percent Stake in Chinese Brewer, Financial Times (London), June 29, 1993, p. 26.

Doebele, Justin, Bear in the China Shop, Forbes Magazine, May 5, 1997, p. 18.

Evans, Mark, Brewers Thirst for Vast Profits, South China Morning Post, July 2, 1993, p. B5.

, Law Laid Down on Interim Results, South China Morning Post, May 26, 1994, p. B3.

Faison, Seth, A Long March to Capitalism, New York Times, December 27, 1995, p. D1.

Fluendy, Simon, Beer Giants in a Froth Over China, South China Morning Post, September 15, 1994, p. B6.

Fung, Noel, Tsingtao Decision Draws Fire, South China Morning Post, October 26, 1993, p. B1.

, Tsingtao Response Surprisingly Quiet, South China Morning Post, July 3, 1993, p. B1.

Harding, James, Changes Afoot at Tsingtao, Financial Times (London), September 9, 1997, p. 29.

, Cuts Strengthen Tsingtao Results, Financial Times (London), August 22, 1997, p. 21.

Heath, Ray, Super Dry on Data, South China Morning Post, October 26, 1993, p. B18.

Hewett, Gareth, Speaking Out Will Help Bring More Tsingtaos, South China Morning Post, July 16, 1993, p. B14.

, Tsingtao Listing Brings Cheer to the Exchange, South China Morning Post, July 16, 1993, p. B1.

Holberton, Simon, Blue Chip Offers from Beijing: The First Chinese Companies to Be Partially Sold in Hong Kong, Financial Times (London), June 18, 1993, p. 14.

, Business and the Law: Solutions to Chinese PuzzleThe Challenges Posed By Listing Mainland Companies on Hong Kongs Stock Exchange, Financial Times (London), July 13, 1993, p. 12.

, Rush to Buy Chinese Brewers HK Offering, Financial Times (London), July 8, 1993, p. 34.

Holberton, Simon, and Louise Lucas, Chinese Stocks Lose Their ShineCaution Is the Watchword, Financial Times (London), May 6, 1994, p. 30.

Ibison, David, Anheuser Deal Could Still Leave Tsingtao Short of Cash, South China Morning Post, April 30, 1995, p. 1.

, Hangover Feeling at Tsingtao, South China Morning Post, April 16, 1995, p. 3.

, Tsingtao Mystery Loans to Come Under Scrutiny, South China Morning Post, April 9, 1995, p. 1.

Investors Souring on Actions of Chinas Tsingtao Beer Managers, Los Angeles Times, May 19, 1995, p. D7.

Janofsky, Michael, Anheuser-Busch Buys Stake in Leading Chinese Brewer, New York Times, June 29, 1993, p. D6.

Johnson, Ian, Chinas Tantalizing Stocks, Baltimore Sun, January 24, 1994, p. 11C.

Ko, Kenneth, Tsingtao Defends Decision on Interim Results, South China Morning Post, October 29, 1993, p. B3.

Lai, Renee, Beijing Is Encouraging Larger Beer Producers to Fend Off Competition from International Rivals; Brewers Turn Their Backs on Foreigners, South China Morning Post, September 12, 1996, p. 8.

, Financial Set Lose Taste for Tsingtao, South China Morning Post, April 27, 1995, p. 28.

, Foreigners Taste for Tsingtao Helps Beat Rising Cost of Raw Materials, South China Morning Post, August 18, 1994, p. B1.

, Tsingtao Acquiring Breweries to Plug Shortfall, South China Morning Post, May 2, 1995, p. 3.

, Tsingtao Asks Partner to Fund New Brewery, South China Morning Post, August 20, 1996, p. B2.

, Tsingtao in Move for Loans of $93m, South China Morning Post, July 11, 1996, p. B4.

, Tsingtao Pauses Before Next Round of Buying, South China Morning Post, August 28, 1996, p. B3.

, Tsingtao Poised to Swallow Two Breweries in Shandong, South China Morning Post, November 5, 1997, p. 3.

, Tsingtao Sees Earnings Dip As Costs Squeeze Profit Margins, South China Morning Post, April 17, 1996, p. 1.

, Tsingtao Takes on the Challenges, South China Morning Post, May 2, 1995, p. 22.

, Yuan Unification Drains Tsingtao, South China Morning Post, August 24, 1994, p. B1.

Lee, Carrie, Tsingtao Chairman Decides His Cup Has Overflowed, South China Morning Post, July 26, 1994, p. B1.

Lee, Teresa, Tsingtao Will Stick to Its Buying Line, Hong Kong Standard, August 25, 1999.

Linn, Gene, China Nine Likely to Spur Hong Kong Stock Exchange, Journal of Commerce, August 31, 1993, p. 11A.

Lucas, Louise, Companies and Finance: Asia-Pacific: Higher Costs Drag Tsingtao to Surprise 9.6 Percent Fall, Financial Times (London), April 17, 1996, p. 37.

, Provisions Hit Chinese Brewery, Financial Times (London), April 21, 1998, p. 36.

, Tsingtao Brewery Ahead, Financial Times (London), August 23, 1996, p. 20.

, Tsingtao Tumbles 74 Percent in Full Year, Financial Times (London), April 25, 1997, p. 30.

Manor, Robert, Anheuser-Busch, Tsingtao Brewery Co., to Part Company, St. Louis Post-Dispatch, April 22, 1996.

McGregor, Richard, Brewing War Leaves a Bitter Taste, Financial Times (London), June 23, 2001, p. 18.

Poole, Teresa, Hong Kong Exchange to Take First Sip of Tsingtao; Teresa Poole Reports on a Milestone in Chinese Reform, Independent (London), June 29, 1993, p. 23.

Qi, Zhi, Beer Market in China (2000), China Economic Forum, Department of Botany, University of Wisconsin-Madison, October 23, 2000.

Reynolds, Nicholas, Leap in Tsingtao Profit Expected, South China Morning Post, January 12, 1997, p. 7.

Ridding, John, Tsingtao in Restructuring to Cut Costs, Financial Times (London), July 11, 1997, p. 22.

Roberts, Dexter, and Alysha Webb, China: Buying Binge, Business Week, January 29, 2001, p. 48.

Sawyer, John, Busch May Build Brewery in China, St. Louis Post-Dispatch, December 8, 1993, p. 1C.

Stock Offer of Chinese Brewery Is Oversubscribed, New York Times, July 8, 1993, p. D4.

Tong, Ivan, Banking on a Familiar Face, South China Morning Post, June 19, 1993, p. B3.

, This Buds for China, South China Morning Post, June 29, 1993, p. B16.

, Tsingtao Attracts Top U.S. Brewer, South China Morning Post, June 29, 1993, p. B1.

Tsang, Denise, Cheung Set to Sell Brewery Stake; Yiu Wing Moves to Cultivate Stable Income Generator, South China Morning Post, July 29, 1996, p. B3.

Tsingtao Buys Jiangsu Brewer, South China Morning Post, October 29, 1994, p. B5.

Tsingtaos Champagne Debut with HK Suitors, South China Morning Post, July 1, 1993, p. B5.

Vines, Stephen, Subscription for Tsingtaos HK Listing Lower Than Expected, Business Times (Singapore), July 3, 1993, p. 1.

Walker, Tony, Tsingtao Loses Much of Its FrothChinese Brewer Fails to Live up to Listing Promises, Financial Times (London), August 29, 1995, p. 17.

Wiseman, Paul, Chinese Beer Barrels up to the Worlds Bar; Tsingtao Learns to Compete in International Market, USA Today, January 18, 2000, p. 1B.

Wong, Kerry, Key Sectors Braced for Bumpy Ride When China Joins WTO, South China Morning Post, February 5, 1995, p. 2.

Yau, Winston, Tsingtao Takes Stakes in Four Breweries, South China Morning Post, November 15, 2001, p. B4.

, Tsingtao Targets Expansion Via Buyouts As Rivals Lift Presence, South China Morning Post, June 26, 2001, p. B3.

, Tsingtao to Grow by Consolidation, South China Morning Post, September 4, 2001, p. B2.

Melissa Rigney Baxter